The
Community Solutions Act of 2001 (H.R.7) introduced by
Representative J.C. Watts (R-OK) is a response to President Bush's
effort to engage both faith-based and community-based organizations
in programs to help the needy. Title II seeks to expand faith-based
initiatives through charitable choice provisions in current law,
and Title III is designed to help lower income Americans build
wealth and strengthen their communities through savings in
individual development accounts (IDAs).

Though
H.R. 7 wisely adopts previously enacted charitable-choice
protections in its treatment of indirect government aid to
religious organizations, it also includes restrictions on groups
receiving direct assistance that could undermine its intent and
reverse established policy. While its provisions for establishing
and funding IDAs through savings matches are complex and somewhat
paternalistic, demonstration projects have shown that IDAs are a
successful way to encourage lower income workers to begin to save.
Including funding for IDAs in H.R. 7 will be well worth the
cost.

Title II:
Expansion of Charitable Choice

Title II of the Community Solutions Act of
2001 (H.R. 7) seeks to expand existing federal "charitable choice"
law to encourage the participation of religious organizations in
programs assisting the needy.1 Passed as part
of the 1996 Welfare Reform Act, charitable choice ends
discrimination on the basis of religion against providers of
certain federally funded social services. It allows religious
charities to compete for anti-poverty money-via grants,
certificates, or vouchers-on the same basis as their secular
counterparts without impairing their religious character. Current
law also includes protections to safeguard the religious freedom of
individuals in faith-based programs.

Specifically, the existing charitable
choice law enables faith-based organizations to compete for welfare
(TANF) money, social services block grant funds, and drug and
alcohol addiction services money. H.R. 7 would expand the
protections in the law against religious discrimination to the
following program areas that now receive federal
funding:

Charitable
choice follows the most recent Supreme Court decisions by insisting
on the equal treatment of religious groups when federal assistance
is made generally available. Last year's 6-3 decision in
Mitchell v. Helms, for example, held that
government-funded computers could go to parochial schools, as long
as the assistance was available to public and private secular
schools. The majority ruled that government may support faith-based
organizations if the purpose is to achieve a legitimate secular
goal-boosting literacy rates, for example-but not to advance
religion. By allowing a Catholic school to receive government
support, the court effectively ended the ban on assistance to
"pervasively sectarian" groups. Charitable choice is the
legislative cousin to the court's understanding of equal
treatment.

As to the
church-state issues raised by H.R. 7, several provisions are
especially important to ensure the independence of faith-based
groups, while extending their compassionate reach to the
poor.

First,H.R. 7 embraces existing charitable
choice law by preserving the right of a faith-based organization to
make hiring decisions based on religious criteria. It requires that
employment practices "shall not be affected by its participation"
in federally funded programs. There is no more vital protection for
organizations with a religiously-rooted approach to social
assistance. It is not hard to understand why: The leadership and
staff of an organization determine its destiny. They alone will
carry out its mission, uphold its priorities, and embody its
deepest values. They are the last defense against
secularization.

Critics of this provision claim that
employment decisions based on religion violate the protections of
the 1964 Civil Rights Act. The architects of that historic
legislation, however, plainly understood the importance of
protecting the integrity of religion in America. While banning acts
of discrimination in employment based on race, ethnicity, gender,
religion or national origin under Title VII, they crafted an
exemption for religious organizations-including churches, colleges,
and universities.2 Congress expanded the
statutory exemption in 1972 to cover most employees of religious
institutions, whether they served in clergy positions or not. The
Supreme Court unanimously upheld the protections in its 1987 ruling
in Corporation of the Presiding Bishop of the Church of Jesus
Christ of Latter-Day Saints v. Amos. It is the critics
of the exemption who are trying to undo 35 years of civil rights
guarantees.

Indeed,
opponents call this protection an excuse for "religious bigotry"-an
astonishing attack on the independence of churches, synagogues,
mosques and religious organizations of every kind. The right of
private religious groups to freely determine their membership is a
cornerstone of our constitutional order. America's Framers could
not conceive of religious liberty-or the existence of civil
society-without this guarantee. This explains its protection by the
First Amendment's religion clauses and by the rights of free
association. Churches and other religious entities do not give up
this fundamental freedom the moment they receive a dime of federal
money. Doing so would make them mere appendages of the
administrative state.

Second,H.R. 7 parallels previous charitable
choice law by mandating that organizations "retain…control
over the definition, development, practice, and expression" of
their religious beliefs. Charitable organizations need not purge
their programs of inherently religious activities-such as prayer,
worship services, Bible studies, or evangelism-in order to receive
federal support. Based on the Supreme Court's current understanding
of the First Amendment, however, such activities must be privately
funded and separated from secular social services. This compromise
approach helps restore a more constitutional view of the
relationship between religion and government.

Third, H.R. 7 would protect
freedom of conscience by making it unlawful for recipients of
assistance to be forced into religious programs against their will.
If someone objects to the religious character of a program,
government must provide an alternative "within a reasonable period
of time." Along with provisions to protect hiring decisions and
program content, this is the brick and mortar of any sensible
partnership between church and state. All previous charitable
choice legislation, signed into law by President Clinton, has
embodied these principles.3

There is
disagreement, however, over the best way to protect the religious
freedom rights of individuals in federally-funded grant programs.
The White House wants the legislation to include three provisions:
1) a notice of rights to alert individuals to their protections
when receiving social services; 2) a "trap-door" provision, which
promises individuals an alternative program if they object to a
religious program; and 3) an "opt-out" provision, which allows
individuals to remain in a faith-based program but not participate
in religious activities. The original charitable-choice legislation
contains both the trap-door and opt-out rules.

The first
two provisions (a notice of rights and a requirement that
alternative services be available) pose no threat to the
independence of religious groups. But the "opt-out" language-more
expansive than existing charitable choice law-unreasonably
interferes with an organization's control over its own program.
According to the bill, activities such as religious instruction,
proselytizing, or worship "shall be voluntary for the individuals
receiving services and offered separate from the program funded."
Allowing individuals to remain in a program while avoiding some or
all of its religious components could compromise the integrity of
many faith-based charities. Aspects deemed vital to the service
could be ignored, while a person's refusal to fully participate
could adversely affect others in the program.

Proponents
worry about people being forced into faith-based services. But
individuals exercise freedom of choice when they first seek help
from a religious organization over a secular one. It makes little
sense to join a 12-Step recovery group and then agree to
participate only in steps 1, 3, 5, 7, 9, and 11. How is the
religious liberty of a person compromised by being required to
participate fully in a program he himself has chosen?

Furthermore, the bill would seem to
compel organizations not only to segregate religious and secular
services, but to offer them in separate rooms or facilities. Though
intended as a legal safeguard, the bill's language places a
needless burden on religious charities. As long as a program's
religious activities are funded privately or run by volunteers,
government should have no interest in the overall religious climate
of the social services made available. Contrary to extreme
separationists, the First Amendment does not give individuals a
right to never hear religious speech that might make them
uncomfortable. As long as alternatives are available, the trap-door
provision ensures that no one would remain in a faith-based program
against his will. This would appear to satisfy the central
objective of the two religion clauses of the First Amendment-to
protect freedom of conscience for people of all faiths or of no
faith.

The same
argument applies to indirect government assistance, otherwise known
as certificates or vouchers. H.R. 7 allows federal grants covered
under its provisions to be converted to certificates or vouchers,
which individuals could use to enroll in secular or religious
programs. This is a much better way to publicly support faith-based
organizations. Vouchers expand the program choices available to
needy individuals, while widening the protections for organizations
involved in caring for them. Under charitable choice, faith-based
groups receiving indirect assistance can infuse their services with
religious activities, with no opt-out rules and no requirements
that the religious and secular aspects be segregated.

H.R. 7 wisely adopts previous
charitable-choice protections in its treatment of indirect
government aid. Any attempt, then, to impose opt-out rules or other
restrictions on groups receiving such assistance would overturn
federal law. It also would reverse established government policy:
Since 1990, for example, poor families have used publicly-funded
certificates to pay for day care at church-run facilities, with no
conditions on providers.4 Clearly, not all faith-based
programs require participation in religious activities; some oppose
the approach on religious grounds. Moreover, the vast majority of
people choosing faith-based groups probably do so because they are
attracted to the religious aspects of the programs. The challenge
is to balance the religious freedom rights of private organizations
with those of the people they are serving.

H.R. 7
strongly affirms that government's social-service regime must not
discriminate against groups guided by their belief in God as they
care for their neighbors. Neither should these organizations be
forced to compromise their religious character or philosophy of
assistance in order to receive public support. Charitable choice
legislation must accomplish both objectives if it hopes to engage
America's Good Samaritans as equal partners with government. If it
does, we can expect more of the nation's poor to find the
compassionate help they so urgently need.

For more information, contact Joseph
Loconte at 202-608-6164.

Title III: Individual Development Accounts

Title III of H.R. 7 would greatly expand Individual Development
Accounts (IDAs). The language comes from the Savings for Working
Families Act introduced as H.R. 2160 by Representatives Joseph
Pitts (R-PA) and Charles Stenholm (D-TX) and as S. 1025 by Senators
Rick Santorum (R-PA) and Joseph Lieberman (D-CT).

How Do IDAs Operate? IDAs are subsidized savings accounts that may be used to build
funds for such purposes as opening a small business, purchasing a
first home, or paying for post-secondary education. There currently
are 14 existing IDA programs in operation.5 Under H.R. 7, IDAs
would be available to individuals between the ages of 18 and 60
whose federal adjusted gross income on their federal income tax
forms does not exceed $20,000 annually, to single heads of
households with incomes below $25,000, and to married couples with
incomes below $40,000.

Individuals and families who
qualify for IDAs would receive a dollar-for-dollar match for the
first $500 saved in the account per person (in families) per year.
Thus, a married couple could receive a match of up to $1,000 per
year. They could save more than $500 per person per year, but only
savings up to $500 would receive any match. The contributions come
from after-tax income, and interest on them would be taxable.
However, any matching funds and interest earned by the matching
funds would be tax-free.

In order to receive the
matching funds, the savers must open an IDA with a qualified
financial institution. For the purposes of Title III, the term
"qualified financial institution" includes any financial
institution that is allowed under federal law to hold Independent
Retirement Accounts (IRAs). In addition, nonprofits such as credit
unions, community development financial institutions, 501(c)3
organizations, and Native American Tribes may sponsor an IDA
program. Nonprofits can affiliate with a profit-making financial
institution or subsidiary.

The IDA savings matches would
be placed in a parallel interest earning account that the account
holder could not access until it is time to purchase the approved
asset. During the savings period, account holders must attend
general financial education classes that are offered through the
financial institution or an affiliated non-profit. This system is
somewhat overly paternal, but does ensure that savings matches are
only used for their intended purpose.

Under Title III, the cost of
the savings matches and certain other costs borne by the financial
institution would be reimbursed through a tax credit payable to the
institution or program sponsor. These tax credits would repay the
cost of the actual savings matches plus an annual $30 per account
to cover administrative costs. In addition, program sponsors would
receive a one-time $100 per account credit to cover the cost of
financial education provided to account holders, marketing,
administration, and similar expenses. Funds would only be available
through 2008 for accounts opened through 2006.

Do IDAs
Work?
Savings are important to low income households for two reasons.
First, through savings goals and budgets, they encourage workers to
focus on the future instead of on instant gratification and
consumption. This changes behavior and improves the odds of getting
out of poverty. They become more focused on improving their
children's lives and are more likely to identify with their
community and to feel that they have a stake in its
future.

Just as important, saving allows low-income workers to build
assets. Studies show that it is very difficult for these workers to
improve their economic status simply through spending their income.
It takes accumulated assets to purchase a house, start a small
business, or to increase one's level of education.

Empirical data from demonstration projects indicate that IDAs
are an effective way for lower income individuals to save for
life-improving purposes. A recent study of the 14 existing IDA
programs shows that participants made a deposit in 7 out of 12
months and accumulated an average of $552 of their own money.6 Most of this money appears to
be new savings that would not have occurred except through the IDA
program.

Through June 30, 2000, the
study found that only about 16 percent of participants had left the
programs without receiving a savings match. The rest either had
continued to build savings or had withdrawn their money and used it
for a purpose that qualified for a match. About a quarter of those
who received a match used their money to purchase a home, and about
an equal proportion invested in a small business. About 21 percent
used their money for education, with the rest using their money for
home repair, job training or retirement.

More important, the data show that when given financial
education, IDAs provide the lowest income groups with an incentive
to build assets. The study showed that lowest income group saved an
average of 5.6 percent of their income in IDAs. This is well above
the national personal savings rate.7 Experts believe
that the combination of financial education and a savings match
provides lower income workers with the belief that they can reach
their savings goal and improve their lives.

Why Use a Tax Credit Instead of a Tax
Refund? If a taxpayer-subsidized savings match is desirable, in most
circumstances it would be preferable to finance it through a refund
of taxes that the individual pays. However, those who qualify for
IDAs have incomes that are so low that in most cases they would not
actually pay any federal taxes. As a result, the matches must be
funded through other methods.

It is true that the mechanism used to fund IDAs is complex, but
it does ensure both that the savings matches are used for the
planned purpose and that the participants receive financial
education that would not necessarily be available otherwise. In
addition, the program is structured to meet its goals with a
minimum level of day-to-day federal involvement that would
otherwise consume money that could be better used to match actual
savings.

Operating the program through community-based organizations and
financial institutions allows the program to meet the special needs
of the populations being served. This helps to avoid the usual
one-size-fits-all mentality found in far too many federal
programs.

IDAs are not perfect. As mentioned above,
the program is complex and somewhat paternalistic. However,
demonstration projects have shown that IDAs are a successful way
for lower income workers to begin to save and to increase their
financial education. Because beginning to save has been shown to
greatly change behavior, it is worth the cost to include funding
for IDAs in H.R. 7.

For more
information, contact David C. John at 202-608-6229.

Joseph
Loconte is William E. Simon Fellow in Religion and a Free
Society and David C. John is Senior
Policy Analyst for Social Security at The Heritage Foundation.

2 Section 702 of the Civil Rights Act of 1964
states: "This subchapter shall not apply to an employer with
respect to the employment of aliens outside any State, or to a
religious corporation, association, educational institution, or
society with respect to the employment of individuals of a
particular religion to perform work connected with the carrying on
by such corporation, association, educational institution, or
society of its activities."

3 Congress first passed legislation
establishing charitable choice in 1996 as part of the Welfare
Reform Act. It was extended to include the Community Services Block
Grant (CSBG) program in 1998. It was extended twice in 2000 to
include drug and alcohol treatment programs under the Substance
Abuse and Mental Health Services Act (SAMHSA).

4 This aspect of the charitable choice debate
is not new. An "opt-out" rule was dropped from charitable choice
legislation passed in December 2000, allowing faith-based
drug-treatment programs to receive federal money as long as secular
alternatives were provided. Opponents of the "opt-out" rule argued
successfully that many religious programs of this kind make faith
commitment a crucial part of recovery.

5 Statement of Ray Boshara, Policy Director,
Corporation for Enterprise Development, "Testimony Before the
Subcommittee on Human Resources and Subcommittee on Select Revenue
Measures of the House Committee on Ways and Means Hearing on H.R.
7, the Community Solutions Act of 2001," 107th Cong.,
1st Sess., June 14, 2001.